The hole hog

Shanghai could soon be China’s doughnut central. On January 25, Dunkin’ Donuts, the global coffee and donut chain, announced that it would open 11 new stores in the city by the end of 2008. They are to be operated by Mercuries & Associates, which also holds the Dunkin’ franchise in Taiwan. The chain has plans to roll out 100 stores by 2018.

Dunkin’ will enter a market loaded with fast-food goodies. Its sole competitor in the doughnut realm will be Mr Donut, operated in Shanghai by Japanese firms Marunjin and Duskin, with six stores in the city. But in the “quick-service” food business, there are plenty of international and local players to contend with.

“It’s a very aggressive world,” said John O’Loghlen, a consultant with Domino’s Pizza in Asia. “There’s a huge number of bakeries in China already, all kinds of people in the pastry business, then there’s the whole coffee concept. I think Dunkin’ Donuts is somewhere in the middle.”

Dunkin’s first foray into China, back when it was still a unit of Allied Domecq, ended in disappointment in 2000. Five years later Dunkin’ was bought out by private equity firms and has expanded aggressively ever since. The company was unable to comment when contacted.

Mainland China would appear to be the big prize. According to market research firm Euromonitor International, the fast-food bakery products market in China is worth US$338 million, having doubled in size between 2001 and 2006. In that context, Dunkin’s stated growth target is relatively modest, noted Benoit Rossignol, managing director of food industry advisory firm Shiyao Investment.

Taste test
Market observers say Dunkin’ has a good chance of success if it can modify its products to match local palates.

In Hong Kong, for example, Krispy Kreme has toned down the sweetness of its products for local consumers.

“Most of the first-time users comment that the doughnut is a bit too sweet for them, so of course we have to tune the taste,” T.H. Jim, chief executive of Krispy Kreme in Hong Kong, said.

One major challenge Shanghai’s two doughnut chains will face is creating an awareness of the new product. Indeed, Mr Donut is looking to its rival to help lighten the load in this respect.

“The competition between us will attract more [consumer attention],” said Qin Yichao, manager of Mr Donut’s shop and location department in Shanghai. “We hope doughnuts will become more popular in China.”

High-end focus
But Mr Donut is not taking Dunkin’s challenge lying down. It plans to open 30 to 50 new stores in and around Shanghai next year. Like many vendors, Mr Donut is targeting middle-class Chinese who seek the novelty of new products.

If Dunkin’ is to take a similar route, analysts say it will have to upgrade its image to compete in a higher-end price range. This is what Yum Food’s brands like Kentucky Fried Chicken and Pizza Hut, which are considered relatively high-end restaurants, have done in China.

“Pizza Hut was able to do it successfully,” said Rossignol. “Dunkin’ will probably have to position themselves in the mid to higher part, rather than too low.”

Whether or not Shanghai becomes a doughnut-munching haven will be decided by another factor tightly bound to the city: the price of real estate. As retail sector rents have shot up, restaurant chains are struggling to keep pace with the best locations. Property consultancy Jones Lang LaSalle estimates that premium downtown retail space in Shanghai will likely rise 13% in 2008 due to expansion plans by restaurants and luxury brands.

“Probably the biggest factor for [Dunkin’], like everyone, is real estate. How can they find a partner that’ll get them into the shopping centers – into the places where people can see their brand?” said O’Loghlen of Domino’s.

While Dunkin’ and Mr Donut duke it out in Shanghai, the last member of the global doughnut trifecta, Krispy Kreme, is looking to take its heavily-glazed, deep-fried rings to Shenzhen.

“We are negotiating with the franchisor but nothing has materialized yet,” said Jim. “Shenzhen is a migrant city, many are from the north, and the people are more receptive to fried products.”

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